29 Aug 2013

With a hotly contested election just around the corner, The Prime Minister Kevin Rudd has come up with a proposal to allow small businesses to defer lodgement of their Business Activity Statement (BAS) from quarterly to annually. He suggests GST could easily be estimated and paid in instalments throughout the year based on the previous year’s performance.

If you’re in business, one of the most important questions that you must be asking yourself is “what is the best way to grow your business?” How can you take what you have, expand on it but keep your costs as low as possible?

Fortunately, history has given us plenty of good examples of how NOT to do this. Perhaps the best of these happened in 2001 – when thousands of companies went under in the dot com bubble.

But how did so many go so far wrong?

In those days, start-ups (with little or no income) and existing companies (with dreams of expanding their business online) were renting the biggest and best offices. They were signing huge print advertising contracts, paying ridiculous sums for banner ads and taking enormous salaries.

When sales were lower than expected and the cash to keep paying all those expenses dried up, these businesses had no way of easily adjusting their monthly expenditures because they were primarily FIXED, not variable. Their only option was to declare themselves bankrupt and close down.

Compare this situation with Amazon.com which started in a suburban garage with old doors on sawhorses for desks. By keeping fixed costs down, they were able to stay in business long enough to start generating a profit. They are now a huge company (with real offices) making huge profits.

So how does all of this apply to your company?

No matter how big your current business is, the aim is to grow your business while keeping your fixed costs as low as possible as a percentage of sales. And there are many practical ways to do this.

Begin by creating a simple excel spreadsheet of your current revenue and expenses each month. Ensure that you have correctly separated the fixed and variable costs of doing business. Roughly speaking, the breakdown should look something like this:

Based on your current financial results, set your monthly revenue targets for the next 12 months and estimate the cost of goods sold. For example, if you currently generate $20,000/month in sales with a 60% gross profit margin, you might like to grow your business by 25%? Therefore, you would use a projected sales target of $25,000 each month with Cost of goods sold at around $10,000 as a starting point. This would leave you with a gross profit each month of $15,000. If your sales fluctuate each month due to seasonal variations, manually adjust your forecast to reflect these ups and downs so that you will have a more realistic picture of your financial performance.

Now here is where most business owners will go wrong…

Most business owners will make the mistake of assuming that fixed costs are fixed – the owner will just blindly start to place the existing amounts for rent, marketing, wages, telephone etc. into the financial projections. Fixed costs are referred to as fixed because they are fixed at a point in time. This does not mean however, that they are fixed forever and cannot be altered. In fact, when you are preparing a business plan and financial projections to grow your business, you should consider almost every aspect of your business as “up for debate and re-adjustment”.

That is one reason why you need a decent business plans – you can use it to re-evaluate and plan for the future so that you can improve and grow your business. Without a concrete plan, in all likelihood, you will continue to get the exact same results that you got last year.

Where you will get the most value in this exercise is by going back over each cost (fixed or variable) to identify opportunities to improve your gross and net profit margins. Cutting costs may be possible and advisable in some areas of your business. However, cutting costs [in isolation] is not usually an effective strategy to grow a business. In order to grow and improve your bottom line, you will need to ask yourself the question – “how can I grow my business without expanding costs”?

Here are some effective ways to do just that:

1. Think of ways to partner with others to expand your reach and sales without actually having to open another location or hire more full time employees. You may already have underutilized capacity to increase your sales right now.
2. Introduce products or services that complement the ones that you currently have and contribute more to the bottom line of your business.
3. Re-negotiate the terms or prices you have with your suppliers to increase your gross profit margin.
4. Selling online is a very cost effective way to increase your reach without increasing fixed costs.
5. If you manufacture goods, you could identify ways to increase production simply by tidying up, rearranging the layout of machines and planning more cleverly (to reduce work in progress and downtime). Often mistakes and rework can be costly to your business and surprisingly, they can be prevented by taking time during the business planning process to brainstorm solutions. Making better use of time is another fantastic way to increase production with minimal impact on fixed costs.

Surprisingly, 95% of business owners never take the time to create a business plan and forecast of revenues and expenses. Of the 5% that do, only a small portion refer back and measure their progress against their key performance targets. That is the number one reason why so many businesses either don’t make much profit, or worse, go under, each year.

A business plan doesn’t have to be 50 pages in length and take 200 hours to complete. It just has to be realistic and useful. To do this properly, follow my basic outline for projected revenues and expenses above. It should only take 48 hours of your time. 48 hours, in exchange for more sales, more profit and peace of mind, is a small price to pay.

It has often been said that “profit is pointless and cash flow is King”. But do you know why?

It is possible for a business to show a profit for a period of time, yet have negative cash flow. In fact, businesses that have profit (on paper) go under every single day. Negative cash flow, if sustained for an extended period of time, will eventually cause the company to run out of money and cease operations. Therefore, knowing the cash flow position is critical to staying afloat and knowing how to unlock more cash flow is imperative to effectively coach a business owner or senior executive.

Are You Chasing The Wrong Target?

You can have the most brilliant product or service but if the business runs out of cash, it won’t matter. Most businesses make the fatal mistake of thinking that they simply need more customers. If only they had more customers, they would have more sales and more profit…and they would be more successful.

But is this true?

Can businesses simply advertise their way into more sales and better results? No. In fact, advertising and discounting often have a negative impact on the bottom line and cash flow.Simply put – the initial instinct most coaches and business owners have is to focus on increasing sales. Employing this strategy in a business coaching context – chasing customers and sales – is often the worst thing you can do for the business.

The common assumption is that if you are running a business (or involved in business coaching) where the price you charge for your products is greater than what they cost, everything will be okay: you will be profitable and successful. Profit is good – don’t get me wrong – but it is simply not enough on its own. To be sustainable, the business must also have a healthy cash flow.

If you are like most coaches and business owners, you never dreamed that the ability to understand how money flows in and out would be incredibly important. You thought: “That’s for the accountant or finance department to worry about. Sure, they may show me a few reports from time to time, but I don’t see the need to really understand what the numbers mean. If there was a problem, they would tell me, wouldn’t they?”

You probably didn’t realise that all those numbers – the financial DNA of the business – can tell you a lot more than you thought. They can tell you why the business is not growing or is struggling to meet targets. They can reveal why there is less money in the bank account [again] than there was last month.

The financial numbers ARE the story of the business. Numbers don’t lie. They are one of the few objective indicators of how a business is performing and where the problems are. Ironically, financials are the most overlooked area of business coaching with the majority of practitioners choosing to specialize in leadership, sales or marketing disciplines. Unfortunately, without a solid understanding of financials, it is impossible to coach effectively and produce predictable results.

Regardless of any justifications you (or your business coaching clients) use to explain why the business is not performing – the economy, the shortage of ‘good’ staff, competition, supply chain issues etc. – the numbers tell the truth and can lead you to the solution. You just need to learn HOW to use them to your advantage.

You need a bit of Financial Foreplay.

Are You Avoiding The Numbers?

When is the last time you took two hours out of your week to analyze the financial statements of a client or your own business? Can you honestly say that you know exactly where you (or they) are at and WHY? Do you sometimes wonder what the numbers are trying to tell you? Are you guilty of wasting money chasing new leads and sales instead of fixing the business and making it more profitable?

Most business coaches and business owners make the mistake of assuming they can improve the business by examining the Profit and Loss and Balance Sheet on a monthly basis. Unfortunately, these statements only tell part of the story. In fact, you cannot measure the cash flow position of a business by looking at the bank balance or examining the financial statements at a specific point in time.

This is because most businesses use what’s called ‘accrual’ accounting. Rather than recording ‘money spent’, they record spending as ‘money spent plus money committed to be spent’. So if stock has been purchased on account, accrual accounting includes the value of that purchase from the point it is made – not from the point when the account is paid. Accrual accounting takes into account the amount of money that has been spent plus committed to be spent in the future. The same thing happens in reverse with earnings – it includes money received plus money expected to be received. When a sale is invoiced with 30 days to pay, the value of that invoice is included in accrual earnings even though the money won’t be received for at least another 30 days.

Therefore, when accountants talk of ‘profit’, then, they usually mean ‘accrued profit’ as opposed to what we would call ‘real or cash profit’. Accrued profit is the expected real profit after ‘spending already committed to’, and ‘earnings expected to be received’, are
taken into account along with real (cash) spending and real (cash) earnings. As a result, the profit showing on an Income (or Profit and Loss) statement is a more complicated and less useful representation of the current financial situation of a business. Net profit cannot be relied upon in isolation to gauge the financial health of a company.

Stated another way, cash flow must be tracked over a period of time and can be measured by the following calculation:

Net profit (year to date)

+/- changes in inventory

+/- changes in accounts receivable

+/- changes in accounts payable and GST and

+/- changes in fixed assets

= Cash Flow

Changes in these 4 items on the Balance Sheet have a significant impact on the cash flow and viability of a business. That is why getting inventory levels right, optimizing receivables and payables and investing only in assets that generate a return, is critical when coaching a business of any size. In fact, a coach can often have more tangible impact and influence on a business by focusing on these 4 areas than on directing effort towards gaining new customers and increasing sales. And oftentimes, it costs the business very little to implement highly effective strategies in these 4 areas.

In practice, it is vital to have an eye on both real profit (cash flow position) as well as accrued profit. It is a common error to focus solely on accrued profit – an error which has the potential to send a business to the wall prematurely.

Are You Sure It’s Profitable?

Profitable growth should be the goal of any business. However, you cannot achieve profitable growth without first establishing that the business is in fact profitable. Attracting more leads or closing more sales may not be enough – the costs and efficiencies in a business change every day and this means that we must constantly monitor and measure results and take appropriate action. Focusing solely on customers and sales is a bit like spending 100% of your time practicing your tennis serve while neglecting to watch the scoreboard, analyze the strategy of competitors and practice your returns.

Break-even is one of the most simple and powerful calculations that you can use yourself and with your clients each month to measure and enhance profitability. A company is said to “break-even” for a period (usually a month) when its sales revenue catches up to its costs. Specifically, accountants talk about break-even as the point where ‘fixed costs’ (rent, salaries, etc.) are matched by ‘gross profit margin’ (sales revenue minus COGS).

Therefore, it follows that break-even with profit is the point in the month where the business covers all of the fixed and variable costs and starts making the desired profit target. Remember, if you and your clients are in business and not running a charity, the goal is profitable growth. In order to achieve profit, you MUST in fact plan to achieve it.

Calculating break-even (and break-even with profit) each month and knowing specifically which day of the month the business breaks-even, allows management to make informed, strategic decisions about how to achieve growth that is profitable for the bottom line and enhances the cash flow position.

Are You Ready To Get Results?

Knowing where the financial pain is when you are coaching a business allows you to focus your time and resources where they will make the greatest impact on the bottom line. And if you are truly serious about being a successful business coach, and it is not just a hobby or a way to pass the time, you will find a way to fit a bit of Financial Foreplay into your day so that you can help others to whip their businesses into shape and start taking home more cash! It’s the quickest and most effective way to get your clients working ON not just IN their businesses.

It’s the club final and you are the favourite to win. There is a big crowd watching and as the game progresses, everything seems to be going to plan. You’re playing well and you’re winning points. Victory can’t be far away. There is only one problem: there is no scoreboard, and the umpire is keeping the score to herself. So no one except the umpire knows what’s really going on.

Nevertheless, you plough on and, despite being in the dark about the score, you feel positive that eventually the umpire will declare you the winner. You are so confident that you can’t help but relax just a little. You start enjoying the party like atmosphere.

Then a shock! Out of the blue, the umpire declares that it is match-point … to your opponent! You can’t believe it. You go back to the baseline, determined, and set yourself up for this big point. But to no avail. It’s too late to get your mind back into gear and you hit the return wide. The game is over, the final is lost. If only you’d been able to track the score during the game. At least you would have been able to fight back a little bit earlier.

Every day, hundreds of businesses, big and small, operate as though they are playing a game of scoreboard-less tennis. Every month the owner runs on feelings for most of the month – no more than a guess about how well the business is travelling. A day or two after the month ended, you will look to the ‘umpire’ – your accountant – who will give you the ‘score’ – your figures. And most times, his perceptions will have proven inaccurate and it is far too late to do anything about it. When things changed in the business – when your ‘opponent’ started to get on top – you simply would not have seen it coming.

Your financials are to your business what the main scoreboard is at a sporting contest. Can you honestly say that you know where you are and where you are going?

Do you often look at your reports and wonder what they mean?

Do you waste money and time chasing new customers instead of fixing your business and making it profitable?

If you are ready to get serious about your business… it’s time for a little Financial Foreplay.

It’s time you learned:

· Why cash, more than profit, is the key to success in business;

· How to find and unlock the hidden profit and cash that is trapped in your business;

· How to use the numbers in your financial statements to give you information that is useful for you – not just useful for your accountant. For instance, I’ll show you how to calculate a few simple but important ratios, to understand the results and to monitor them on an ongoing basis;

· How to stop making common business mistakes that are preventing you from being as successful as you deserve to be;

· Why too much inventory can strangle your business;

· How to manage debts owed to you and minimize the risk of default;

· How to charge the right price for your goods and services;

· How to decide whether an investment will be a good use of your company’s money or not;

· How to work out when, during each month, you ‘hit the front’ and start being profitable;

· How to set powerful and meaningful targets that will focus the attention of both yourself and your staff on making good decisions and taking positive actions ALL the time;

· A way to measure and track your financial success in a simple and meaningful way; and

· How to eliminate the unproductive habits that have been holding you back.

You will learn all this through the stories of my clients. Powerful stories about real business owners, just like you, with common financial problems. I’ll show you how these business owners found themselves in trouble, how they worked out what was wrong (with a little help from the financial numbers) and how they took action to turn things around.

While only 2 pages in length, the executive summary is by far the most important component of your business plan or proposal. It is designed to summarize the key elements, capture attention and most importantly, showcase the financial highlights.

So, if you only have 2 pages to convey a significant amount of information and summarize the financial upside, how do you decide what to put in and what to leave out? Which financial features are critical to emphasize?

Depending on the purpose of your document and the intended audience (investment, sale, partnership, strategic alliance, joint venture etc.), you will want to tailor your financial disclosure to suit their needs and expectations. What would they want/need to see in order to make an informed decision?

At a minimum, you need to clearly state what financial input is required from them and what they will get in return – i.e. a share, debt instrument, license, exclusive right etc. Next, highlight the expected net profit and cash flow over 2-3 years. Also, give a clear indication of return on investment (ROI) AND a realistic, well defined exit strategy.

In an executive summary, it is important to be succinct and focused. It is not the time to tell your life story, overpromise with unrealistic projections or overwhelm with too much detail. You will only get one chance to make a good first impression and capture the attention of the reader. In fact, many sophisticated investors have told me they rarely read a business plan or proposal in its entirety. They make their decision on the strength of the executive summary and their assessment of the owner/manager (in terms of character, knowledge, skills and tenacity).

Focus on “what’s in it for them”. Show them clearly how they can benefit and when the result will be crystallized. Give them enough detail to understand the industry, opportunity and unique solution you provide. And most importantly, clearly summarize the key financial metrics of profitability, cash flow and ROI.